FIRE in the Age of COVID-19 (Part II: Preparing for the Next Storm)

The COVID-19 (aka, coronavirus) pandemic has been devastating. At the time of this writing, there are over 1.4 million cases worldwide and 80K deaths. The U.S. alone has over 385K cases and 12K deaths.

And then we have the financial impacts. From Fortune (3/23/20):

The International Monetary Fund said it expects a global recession this year that will be at least as bad as the downturn during the financial crisis more than a decade ago, followed by a recovery in 2021.

The glimmer of good news is in that last part -- “a recovery in 2021.” While nobody knows exactly how this pandemic will play out, there is hope that we can recover financially afterwards. 

Because this crisis is so complex (affecting everyone’s health and safety, as well as the economy), we decided to tackle it in two posts. Part I: Surviving the Storm provided information and resources to get you back on your feet and make sure you don’t drown. 

This post, Part II: Preparing for the Next Storm, will help you get your financial house in order so you can learn from this event and survive (and later thrive) after the next crisis.

 

The FIRE Movement after COVID-19

One of the big financial questions being asked now is “How does this crisis impact the FIRE movement?” Some people may question whether it’s still possible (or makes sense) to FIRE after an event of this magnitude. On the other hand, many of the tenets of FIRE are exactly what are needed to survive a financial crisis.

“Everyone has a plan until they get punched in the mouth.” - Mike Tyson

What do we think? Well, we’ve been following the fundamental principles of FIRE since the late 1990s, way before we had ever heard of it. Financial best practices such as long-term investing, living frugally, and reducing debt helped us get through two other major financial crises (the Dot-com bust of 2001 and the Great Recession of 2008-09).

That being said, some of the practices in the FIRE community prior to the COVID-19 crisis may need to be re-examined and re-evaluated. It’s easy to get complacent and overconfident in the midst of an 11-year bull market. While nobody could have foreseen such a sharp and swift downturn, most long-term investors have been warning about a bear market for some time.

Here’s how we would assess FIRE, post-coronavirus...

 

What Stays the Same (& Is Even More Important)

Some of the foundations of FIRE are not only going to stay the same, but they’re going to be even more important. Why? Because this pandemic has shown that sudden seismic events outside our control can occur and affect us at any time. Therefore, it’s crucial to always be financially prepared.

Maximize your Income  

A staggering 10 million workers in the U.S. filed for unemployment benefits in just the last two weeks (this is more job losses than we saw during the 18 months of the Great ‘08 Recession).

(Note: see Part I for recommendations if you lost your job or got furloughed.)

Most of these workers were completely blindsided. Who would have expected so many jobs in the retail, travel, and dining industries to essentially vanish overnight?

“Make hay while the sun shines” (Proverb, meaning to take action while a situation is favorable)

To protect against the possible loss of a job, it’s important to do two things when the economy is strong: 1) increase earnings at your existing job, and 2) create additional sources of income.

  1. Increase your earnings. Take on more responsibilities at work, add more hours (if you’re hourly), and jockey for a promotion or raise. Sometimes that means finding a better opportunity elsewhere (I switched jobs six times over my career for a better position, salary, or potential opportunity).
  2. Find additional revenue sources. Create an asset you can sell or monetize (e.g., a book, course, blog, etc). Offer a freelance service (e.g. marketing, design, etc.). If you’re an expert in your field, perhaps you can book speaking engagements or join a Board of Directors. Also, look for passive income opportunities (e.g., investment property, dividend stocks, etc.).

We ran a very successful side business for many years in the mid-2000s, taking advantage of a niche opportunity with affiliate marketing and Google Adwords. Find more ideas in our Increasing Your Income resource page.

And once you’ve increased your income, what do you do with that money?...

Long-Term Investing

The FIRE community is big on the “set it and forget it” mindset of financial investing. Some of the most popular books, like The Simple Path to Wealth and the The Automatic Millionaire, stress the importance of making investing as easy as possible. 

You can select a few key low-cost index funds (e.g., we own VTSAX and VBTLX in Vanguard) and set up an automated investment schedule. This is an excellent way to build out a long-term investment strategy. We use Vanguard for most of our investments, but Fidelity and Schwab are also good options. See our Investing & Saving resource page for other suggestions.

Maintaining this thoughtful long range investing mindset is definitely just as important as it was before the coronavirus crisis. What may change after the crisis is how aggressive to set your asset allocation (we’ll look at that in a bit).

Frugal Living

Most people would agree that living frugally is an important component of the FIRE lifestyle. Allison and I still watch our expenses closely, even after five years of FIRE. It’s become ingrained in our behavior, and frankly it feels good to be mindful about our spending. 

Unfortunately, there are a lot of people out there who are going to really struggle to cut their expenses during this time of crisis. The time to practice frugality is when the economy is solid, not when you’re in the middle of a pandemic and forced to use behaviors outside your normal zone (e.g., having groceries delivered).

Think of it as a gift to be able to be happy living on less. We certainly don’t advocate living like a miser (we love the occasional splurge on travel or dining out), but in general it feels good to keep extraneous expenses low and spend money on experiences. 

Living frugally is a skill that you can develop over time. For tips, read the 4 Money Lessons I Learned from My Super Frugal Wife (respecting money, DIY, buying in bulk, and getting free stuff). 

And check out How We Live Comfortably for Under $3K per Month in the Bay Area (ways we reduced our expenses over the years in the most expensive region of the U.S.).

Debt Reduction

The last thing you want when a financial crisis hits is a mountain of debt on your back. If you have high-interest rate debt such as student loans, car loans, and credit card debt, you want to make a strategic effort to pay them off when times are good.

You can use the Dave Ramsey Debt Snowball Method by paying off your smallest debts first. While we don’t espouse all of Ramsey’s suggestions (for example, never using a credit card, even if you pay it off in full each month), we do recognize that his debt reduction approach has worked for many people.

snowball

Alternatively, you can pay down your highest interest rate debt first. This would be the approach we would suggest, but it does require a little more attention and developing a plan. Create a list of your debt in order from highest to lowest interest rate and aggressively pay down the highest rate debt while making minimum payments on the rest. After you pay off the debt with the highest rate, pay down the next highest rate. Rinse and repeat.

We have always been good about staying debt free (other than home mortgages) for most of our working careers. We drive an older car (we just bought a newer model after 17 years), and we always pay off our credit card in full. But the biggest move we made was when we used geographic arbitrage to move from San Francisco to Oakland to pay off our mortgage completely. It allowed us to FIRE nine years ahead of schedule!

 

What Needs to Be Re-Examined

Most of the principles of the FIRE Movement are rock solid, but some practices have become looser over the past several years. We’ve had an 11-year bull market, so it’s just human nature to assume the good times will keep on going. 

For some people, it’s because they’re younger and/or weren’t investing during the last major financial crisis. Even for those who were affected by the Great ‘08 Recession, they may be suffering from “recency bias.” 

Recency Bias = the phenomenon of a person most easily remembering something that has happened recently, compared to remembering something that may have occurred a while back.

Having gone through two previous major market crashes, we’ve developed and continued to adhere to a more conservative strategy than many in the FIRE community may follow.

Here’s our take on some of the more common FIRE community practices…

The 4% Rule (& Multiply By 25 Rule)

One of the most often cited “rules” in the FIRE community is the 4% Rule, and to a slightly lesser extent, the Multiply By 25 Rule.

Simply stated, the 4% Rule says that you can withdraw 4% of your investment portfolio each year in retirement to pay for your annual expenses. It was derived from the Trinity Study, which looked at historical data over a 50-year period of stock and bond returns. 

The Multiply By 25 Rule is viewed as the inverse of the 4% Rule. It looks at how big your investment portfolio should be in order to safely retire. It says that your nest egg should equal 25 times your annual expenses.

We have always recommended, in our blog posts and courses, to shoot for more than these rules suggest.  

For example, here’s one of our earliest blog posts, What To Do in Your 20s So You Can Retire By Your 40s, written in May 2017, when the stock markets were still on a direct course upward. Here’s what we wrote then:

One final bit of advice on the 4% Rule and the Rule of 25 — you should consider these to be your minimum requirements for setting your Nest Egg goal.

If you can live on 3% or 2% of your Nest Egg, that will give you even more security! If you want to play it safe, aim for a Nest Egg goal that’s 30x or more of your Yearly Expenses.

And yes, we practice what we preach. Our withdrawal rate is less than 3%, and our portfolio is well north of 30x our yearly expenses. This is thanks to many years of building our nest egg and keeping our expenses low. 

Asset Allocation

The FIRE community has always been very bullish on investing heavily in the stock market. In fact, many FIRE enthusiasts suggest holding as much as a 100% allocation to stocks. Unfortunately, when the market first started decreasing, many people started panicking and questioned whether they should sell their stocks and move to bonds.

We are firm believers that investing in the stock market is a very important component of achieving FIRE. If we had put all of our money into bonds or money market funds, we would never have been able to FIRE in our 40s.

That being said, there’s a reason that most financial professionals suggest having a mix of stocks and bonds in your portfolio. Stocks (or equities) historically perform much better than bonds, on average, but they’re also more volatile.

To show this graphically, here's a 20-year chart of VTSAX (Vanguard Total Stock Market Index Fund) in blue vs. VBTLX (Vanguard Total Bond Market Index Fund) in red. VTSAX performs better over time, but you have to weather the ups and downs. VBTLX has smaller overall gains but is slow and steady, even during major market crashes...

VTSAX & VBTLX comparison
VTSAX Stock Fund (Blue) & VBTLX Bond Fund (Red) comparison

So, it boils down to how much time you plan to be in the market (essentially your life span) and what is your risk tolerance? If you’re relatively young (e.g., under 35 years old), then you have many years to weather the down markets. 

For example, if you’re currently 30 years old and are regularly investing into a 401(k) plan with your employer that’s 90% stock, then it’s probably a good idea to continue with that strategy. If you have a portfolio that is 50/50 stocks and bonds at this age, then your conservative approach would most likely leave a lot of money on the table during future bull market years.

As you get a little older, it’s smart to start rebalancing your assets. We went from a stock / bond / other (e.g., REIT, metals, cash) allocation of about 80/17/3 before we FIRE’d to about 55/35/10 afterwards.  This gives us more diversification and more importantly, it keeps our nest egg from dropping too far during times like this. 

The pie chart on the left is from before we FIRE’d, and the one on the right is after we FIRE’d.

Before and After FIRE Asset Allocation
Before and After FIRE Asset Allocation

We’ve been able to see in real time this past month how our bond funds have essentially stayed even, or at times even gained, while our stock funds nose-dived. We’re pretty confident that our stock funds will eventually increase, but it gives us a little peace of mind to see our overall portfolio a bit more stable.

Emergency Cash

Everyone knows they should have an emergency stash of cash; situations like the one we’re in now offer a real-life justification. The question is how much should you keep on hand?

Conventional wisdom dictates holding three to six months worth of expenses in cash held in a money market or high interest online savings account. Our recommendation is that you increase that number to 12 months (or more) of expenses. When the COVID crisis is over, you can work on slowly building up your cash reserves.

Of course, it’s no fun to see that much money earning very little interest, but you’ll be happy to be able to cover your expenses if you lose your job or other sources of income for a period of time. You don’t want to have to tap into your investments (and sell them at a loss and/or incur an early withdrawal penalty) in order to pay your bills. 

Real Estate Investments

Investing in rental properties is very popular in many sectors of the FIRE community. During good times, it can be a very lucrative and, in some cases, relatively passive source of additional income.

However, in hard economic times, real estate investments can take a beating. If your tenants lose their jobs and can no longer pay their rent, that’s going to be a problem. And if the situation is bad enough, you may not be able to find new tenants. Meanwhile, you still have to pay your mortgage, property tax, insurance, maintenance and management fees.

We’re not suggesting that you shouldn’t invest in real estate anymore. Rather, you should make sure that your real estate investments are as rock solid as possible.

  • Follow the 1% rule: This states that the monthly rent amount you charge for a property should be equal to or greater than 1% of the purchase price. For example, if you bought your unit for $250,000, you should be able to charge at least $2,500 per month for that to be a good return on your investment.
  • Pick the right location: You want to be someplace that will continue to be in high demand both in good and bad times. One example is near a college campus, especially if they have a strong graduate program, so you can rent to a constant supply of smart ambitious young adults.
  • Don’t over leverage yourself: If the real estate market goes bad, you don’t want to have to face foreclosures that could ruin your credit for many years. Make sure you have an emergency fund to cover your real estate expenses in addition to your personal emergency fund.

 

Final Thoughts

At the end of the day, we will eventually get through this current crisis, just like we got through major disasters in the past such as the 1918 influenza pandemic, World War II, 9/11, and the Great ‘08 Recession

The question to ask yourself is, what lessons will you learn from the COVID-19 pandemic so that you’ll be better prepared financially for the next crisis? Not to be alarmist, but it’s not a matter of if but rather when we’ll be faced with another major crisis (e.g., climate change, war, natural disasters, and future pandemics).

The good news is that, while we can’t predict when disaster will strike again, we can do quite a bit to protect ourselves ahead of time. So, when this crisis is over and people are going back to work, and the markets are heading back up to pre-crisis levels, go through your finances and get properly set up for the next ride.

Allison and I are in this for the long haul, and we hope that you will be too. Stay home, keep safe, and hopefully we will all be able to get back together with friends and family soon! 

3 Responses

  1. […] Part II: Preparing for the Next Storm will help you get your financial house in order once things settle down. The time to prepare for a storm is before it hits, and there are a number of things you can do to help you weather future disasters. […]

  2. […] Dylin from Retire by 45 shares what he and his wife have learned from the perspective of a couple of early retirees. FIRE in the Age of COVID-19 (Part II: Preparing for the Next Storm). […]

  3. […] Of course, it wasn’t always smooth sailing. We survived two major economic downturns, I almost died from pneumonia, and I had to get my hip replaced. And like everyone else, we’re all dealing with the challenges of the COVID-19 pandemic (see our posts FIRE in the Age of COVID-19 Part I and Part II). […]